Why CVS Stopped Selling Cigarettes

CVS's (NYSE: CVS  ) decision to stop selling cigarettes in the United States as of Oct. 1 may be a move designed to help the company grow its in-store clinics.

With the U.S. government projecting that health care spending will rise to 20% of GDP, as reported by Bloomberg, CVS, Wal-Mart (NYSE: WMT  ) , Walgreen  (NYSE: WAG  ) , Rite-Aid (NYSE: RAD  ) , and other smaller players are rapidly opening health clinics in their stores. These clinics, which offer basic health services including flu shots and other medical procedures that usually require visiting a doctor, represent a growing opportunity for the chain.

"Health care is becoming more decentralized, and consumers are getting more choices about where to get care, whether that's a retail clinic or a traditional hospital," said Vaughn Kauffman, a principal in PriceWaterhouseCooper's Health Industries practice, in The Washington Post. "As we're out there talking to companies that are in retail, they see big opportunity here and are looking for ways to give consumers more convenient options."

More clinics to come

Health care spending is on the rise partially due to the improving economy and partially due to the people who are gaining health insurance through the Affordable Care Act. And though CVS sells other unhealthy products, tobacco may be the most harmful and least consistent with presenting a healthy image. According to the Centers for Disease Control, "smoking is the leading cause of preventable death and illness in the United States and causes an estimated 443,000 deaths a year in the nation."

Offering tobacco products next to what is essentially a doctor's office is sort of like having your Weight Watchers meeting at a Pizza Hut. CVS still offers lots of ways for customers to harm themselves (sugar and, in some markets, alcohol being the obvious ones), but removing smoking might allow for expansion of the chain's 750 Minute Clinics (as it calls its walk-in health centers).

Currently, CVS has a number of contracts with hospitals and health insurers to provide patient care -- in many cases during evening and weekend hours when traditional doctors' offices are closed. "CVS could now strike deals with more traditional health-care providers that might involve a financial bonus if the pharmacy helps reduce smoking rates among patients," according to The Washington Post article cited above.

The chain reported in its 2012 annual report that it already has deals with 250 commercial and government health plans. (The company does not break out financial results for the clinics in its quarterly or annual reports.)

"CVS Caremark is continually looking for ways to promote health and reduce the burden of disease," said CVS Chief Medical Officer Troyen A. Brennan, M.D. "Stopping the sale of cigarettes and tobacco will make a significant difference in reducing the chronic illnesses associated with tobacco use."

Candy, alcohol appear safe

When CVS announced it would drop cigarettes at its 7,600 locations in the United States earlier this month, the next logical question was whether the chain would similarly remove other unhealthy items from its shelves. It seems, however, that the company's concerns for the nation's health only extend so far.

"The decision to stop selling tobacco products underscores our role in the evolving health care system. Smoking is the leading cause of premature illness and death in the United States. Unlike those other products, which are OK in moderation, no amount of tobacco use is safe," said CVS spokesman Danielle Marcus in an email interview with the Fool.

Health care is a bigger business than smoking

While CVS may very well be ending the sale of cigarettes in its stores for purely benevolent reasons (and politicians may be saying what you want to hear because they actually believe it), expanded clinics are simply a bigger business than cigarettes.

Health insurance provider Aetna examined the rising cost of health care and found "total health care spending in the United States is expected to reach $4.8 trillion in 2021, up from $2.6 trillion in 2010 and $75 billion in 1970." It's a big pie that's growing bigger, and CVS is eagerly sticking its fingers in.

Dropping cigarette sales, CVS said in a press release, would cost the company $2 billion in 2014, but while health care spending is rising, health officials expect cigarette smoking to continue to fall -- perhaps even to zero. Acting U.S. Surgeon General Boris Lushniak last month released a 980-page report on smoking that pushed for stepped-up tobacco-control measures.

"I can't accept that we're just allowing these numbers to trickle down," he said in a recent interview with the AP as reported by the Denver Post. "We believe we have the public health tools to get us to the zero level."

The war is over

Cigarette smoking is actually bad for you and efforts to make the public aware of those dangers have largely worked. We've banished smokers from the workplace, restaurants, and in many places, bars. In general, efforts to make smokers and smoking seem awful have been successful.

Getting out of the tobacco business to improve its image as a health care provider and, perhaps grow its clinics, is simply good business for CVS.

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 11, 2014, at 9:25 AM, pondee619 wrote:

    "Getting out of the tobacco business to improve its image as a health care provider and, perhaps grow its clinics, is simply good business for CVS"I

    If nothing else, it has the whole country talking about CVS.

    ""I can't accept that we're just allowing these numbers to trickle down," he ( Acting U.S. Surgeon General Boris Lushniak) said in a recent interview with the AP as reported by the Denver Post. "We believe we have the public health tools to get us to the zero level.""

    We could just ban the growing of tobacco, the manufacture, sale and possession of tobacco products. That worked so well in the in the '20s and early '30s.

  • Report this Comment On February 11, 2014, at 10:54 AM, Trumpace wrote:

    CVS in my opinion is making a mistake by singling out one bad element in society being cigarettes. It will affect sales of other products too as those customers will go elsewhere and that includes prescription drugs. Just wait and see. I think within six months or less after in place, CVS will have to rethink this move because of the revenue decline. Share holders of CVS will not be happy with the revenue decline.

    I am not sure why they picked cigarettes over other more harmful general products like alcohol and candy. But considering the times we are in where someone other than ourselves will be making decisions on our health, it is not too surprising.

  • Report this Comment On February 11, 2014, at 10:58 AM, EnigmaDude wrote:

    ^more harmful products?

    Are you kidding? Tobacco is the most harmful product that is sold legally in the US!

  • Report this Comment On February 11, 2014, at 1:53 PM, Trumpace wrote:

    Not sure about that, Cigarettes are harmful to those who smoke but if you look at candy and alcohol more people consume those products thus my remark of more harmful products. Diabetes and dementia, not to mention various organ diseases from just these two other products affect many more people individually. All are bad, don't get me wrong, but it is a matter of choice on an individual means, which one or all or none to consume. CVS took it upon themselves to choose which one they would ban on behalf of their customers..., knowing the others do hare too. So what did CVS get out of this, well free advertising, a longer time to start the ban (why the time frame is a question itself). One has to wonder if they will go ahead with the Ban or go for the more free advertising they would get by reversing their decision to ban tobacco. We'll find out.

  • Report this Comment On February 12, 2014, at 4:19 AM, jbomb62 wrote:

    I wrote a similar article on CVS, Dan. In doing my background work to write it, the ACA does seem to provide opportunities for drugstores and pharmacies to get into the healthcare business; in fact, CVS, through their Pharmacy Advisor program began managing the health of its customers back in 2011.

    What CVS has been doing especially well is getting out in front of its competitors, like Walgreen and Rite-Aid on the in-store clinic segment of the business.

    While they may take a short-term hit from loss of revenues in no longer selling tobacco, they stand to profit in the long-term, and the positive publicity won't hurt them, either.

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